Govt. & Corporate Bonds And Debt Papers

Corporate bonds

  • Corporation bonds, or as they are also known as corporate bonds, are financial obligations in the form of securities which corporations offer to the public in exchange for capital. In simpler words investors give their money out to the company and in return they are given a fixed amount of interest to be paid as well as the face value of the bond after the bond has reached its due date. The payouts are higher as compared to government securities but have varying risk borne out of the credit rating of the firm that floats the Instruments.

Major features to know about Corporate Bonds
  • Higher Returns: Compared to government bonds, corporate bonds are relatively riskier for investors; therefore, they are issued with higher interest rates. This makes it attractive for investors in need of income and who can handle the associated risks.
  • Credit Ratings: Corporate bonds receive credit ratings from Moody’s, Standard & Poor’s or Fitch which are based on the company’s capacity to repay loans. The better bureaus bonds are investment grade bonds, yield relatively low returns than the risky bonds but less likely to default while the risky bonds yield a high return but contain high probabilities of the debtor firm defaulting on the bond.
  • Fixed Income Payments: Coupon payments are paid to investors at fixed intervals usually semi-annual and thus investors continue to earn a fixed interest income on their bond investment. This income stream attracts investors due to its steady and constant income generation, which most income investors pursue.
  • Maturity Date: Commercial bonds have a fixed due date that indicates when the issuer would settle the face value to bondholders. The maturity period of these investments could take several years up to several decades, which gives the investor the flexibility of investment term.
  • Liquidity: Most corporate bonds float in bond markets which mean that there is market liquidity in which the bonds can be bought or sold before maturing. However, there exists some variability across the marker in these regards together with the bond issuer.
  • Diversification: The incorporation of corporate bonds in the investment process can help to reduce risks other than equities and government bonds. Such diversification may also enable the portfolio to level off returns and overall risk on investment.

Government Bonds

  • These are securities the investors offer to the government whereby they lend money to the government for a fixed period with interest being paid periodically together with the face value upon the maturity period. They are ranked among the safest securities owing to a very limited possibility of the government’s default

Major features to know about Government Bonds
  • Low Risk: Government bonds are of the safest investment opportunities because they are issued by the government, and payment is guaranteed by the credit and taxing power of the government. This security is greatly appreciated during periods of flare up in the market.
  • Regular Interest Payments: Bondholders are paid interest frequently, usually semi-annually, thus, giving investors a constant and predictable cash flow. This makes government bonds to be suitable for the income seekers investors.
  • Fixed Maturity Date: The bonds issued by the Government have a specific date of maturity in which the borrowed amount also referred to as face value or principal amount is paid. This leads to surety concerning the payback of the investment.
  • Liquidity: As with most government securities, government bonds are very easy to trade in the secondary market. This also makes it easier for an investor to be able to get his money if, for instance, before the bond is due.
  • Tax Benefits: Occasionally, interest on the government bonds is tax free for state and local; making such bonds sweet for the investors.
  • Diversification: Government bonds as an investment mean can help to diversify an investment portfolio and decrease the overall risk and volatility.

Debt Papers

  • Debt papers are debt instruments that companies use when seeking to raise funds from the investors. These instruments assure the reimbursement of the principal amount, and an interest rate for a fixed tenure, making them one of the key segments of the financial markets

Major features to know about Debt Papers
  • Fixed Interest Payments: Debt papers offer investors fixed periodic income in form of interests thus it is safe to say that it offers predictable income. For this purpose, there is this feature to satisfy those who need steady returns more than anything associated with income earning capacity.
  • Maturity Date: Every debt paper contains details of the maturity date on which the issuer of the paper returns the principal amount to the investor. This brings out the timeline for the return of the investment and this assists investors in managing their cash flows.
  • Diverse Issuers: Debt papers can be floated by many bodies such as the government, business organizations, lending institutions, and even city municipalities. The diversity is of great importance since investors can invest in various numbers of issuers that may have different amounts of risks and credit ratings.
  • Liquidity: Debt papers are traded in secondary markets based on the basic and conditionality of their type, which gives investors the opportunity to sell such securities and simultaneously receive the corresponding flexibility. This liquidity makes debt papers more attractive because they are traded before the maturity periods arrive.
  • Risk Levels: Debt papers have different relative risks which are mainly dependent on the credit ratings of the issuer and kinds of security offered. There are generally government debt papers which have relatively low risk due to the fact that they are guaranteed by the government while on the extreme end we have the corporate debt papers which have relatively higher return but higher risk.
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